2.2.2 + 2.2.5 Aggregate demand and aggregate supply analysis

Question 1

What does the AD curve show

Answer 1

the relationship between the level of real planned expenditure and the general price level in an economy

Question 2

Components of AD

Answer 2

= C + I + G + (X-M)

Question 3

Fall in price level =

Answer 3

extension of AD

Question 4

Rise in price level =

Answer 4

contraction of AD

Question 5

PL + AD = inverse relationship because

Answer 5

1. Real income effect: As PL falls, real value of income rises, consumers buy more; higher consumption C
2. Balance of trade effect: fall in relative price level of a country could make foreign-produced goods more expensive, causing rise in exports, + fall in imports.
3. Interest rate effect: If price inflation = low, might lead to a reduction in IR and less incentive to save = consumption C rises, ER could also depricate + improve (X-M)

Question 6

Factors that shift AD Curve? (6)

Answer 6

• change in real income and employment
• change in consumer and business confiendence
• change in household wealth
• change in monetary policy
• change in fiscal policy
• change in ER + global econ

Question 7

Factors that shift the AD curve

change in real income and employment

Answer 7

economy growing + stable inflation = real incomes increase = more disposable income = increased consumption = increase in AD

Question 8

Factors that shift the AD curve

changes in consumer and business confidence

Answer 8

high = C + I demand grow = increase in AD

Question 9

Factors that shift the AD curve

changes in household wealth

Answer 9

wealth effect = asset prices increase = more confidence = increased C = increased AD

Question 10

Factors that shift the AD curve

changes in mentary policy

Answer 10

low IR = saving less attractive = increased C + I = increased AD

Question 11

Factors that shift the AD curve

changes in fiscal policy

Answer 11

gov can increase its own spending = increases gov spending = increased AD
cutting tax = boosts C

Question 12

Factors that shift the AD curve

changes in ER and global economy

Answer 12

deprication reduces export prices and increases import prices = net exports rise = increased AD

Question 13

SRAS

Answer 13

total planned output when the general price level can change but the prices and productivity of factor inputs are held constant. In the short run, the SRAS curve is assumed to be upward sloping

Question 14

Movements along the SRAS Curve

Answer 14

a change in the price level brought about by a shift in AD results in a movement along the short run AS curve. If AD rises, there is an extension of SRAS; if AD falls there is a contraction of SRAS.

Question 15

LRAS

Answer 15

total planned output when both prices and average wage rates can change – it is a measure of a country’s potential output and the concept is linked to the production possibility frontier
- LRAS curve is assumed to be vertical (i.e. it does not change when the general price level changes)
- represents the economy’s productive potential

Question 16

Factors that shift the SRAS curve (8)

Answer 16

1. changes in wage cost
2. changes in productivity
3. changes in unit labour costs
4. changes in commodity, energy + raw material cost
5. changes in education
6. changes in indirect tax + subsidies
7. changes in ER
8. changes in regualton

Question 17

Factors that shift the SRAS curve

changes in wage cost

Answer 17

if firms can pay lower real wages, this reduces their costs of production making them more willing to supply.

Question 18

Factors that shift the SRAS curve

changes in productivity

Answer 18

if labour become more productive – more output per labour input, this increases the efficiency and more can be supplied.

Question 19

Factors that shift the SRAS curve

changes in unit labour costs

Answer 19

Unit labour costs = labour cost per unit of output. If wages fall relative to productivity growth, then ULCs fall, reducing costs to businesses, so they will be prepared to supply more.

Question 20

Factors that shift the SRAS curve

changes in commodity, energy and raw material costs

Answer 20

if the cost of buying raw materials, energy and other commodities needed for production fall, production costs fall and SRAS shifts right.

Question 21

Factors that shift the SRAS curve

changes in education

Answer 21

mproved education and training boosts skills and occupational mobility, which helps increase productivity, reducing the costs of production and increasing SRAS.

Question 22

Factors that shift the SRAS curve

changes in indirect tax + subsidies

Answer 22

if indirect taxes are cut and/or government subsidies are increased, this reduces the costs of production and SRAS shifts right

Question 23

Factors that shift the SRAS curve

changes in ER

Answer 23

an appreciation decreases import prices; if a country is a net importer of energy, raw materials and components, this decreases the costs for many businesses and SRAS shifts right.

Question 24

Factors that shift the SRAS curve

changes in regulation

Answer 24

f the government reduces the red tape and bureaucracy for businesses, this reduces their costs and SRAS shifts right.

Question 25

factors that shift LRAS curve

Answer 25

• Change in the quantity of resources (land, labour, capital & enterprise)
• Change in the quality of resources
• Technological progress
  = underlying economic grwoth is represented by a right shift